• Wedbush keeps an Outperform rating on Zscaler and raises its target…• Analyst Daniel Ives cites the "massive tailwinds" in the cloud security products with growing momentum heading into the next 12 to 18 months.• Ives says ZS has a "long runway ahead" and "a competitive moat that we view as very defensible."

When I talk below about how this is the year that the investing community has finally caught on to what WE have been aware of for the past two years, the above news bit from last Wednesday is a good example. A year ago everyone was talking about how overvalued Zscaler was. Now it’s well more than twice its year-ago price, and people are discovering its merits.

By the way, if you have a tendency to skip through parts of my monthly summaries, feeling they look familiar from the month before, I’d suggest that you read through instead, as I constantly make changes and include new reflections, thoughts, and observations each month, even in parts which superficially may seem repetitive. For example, my end of June explanation of the valuations of our companies was considerably modified, simplified, clarified, and improved, from the end of May version. Also some ideas are worth reminding yourself of, even if you’ve read them before.

This is my summary of my positions at the end of July. As I usually do, I figure my month as of the last weekend of the month for my own convenience, so next Mon, Tues, and Weds will carry over into August. As always, I’d welcome questions or comments on what I did or didn’t do, and will try to respond.

Please note that at least three of our companies (Alteryx, Square, Twilio) will announce earnings next week. Please note also that in my discussions of company results, I almost always use the adjusted values that the companies give.

In the past two monthly portfolio reports I have done my best to explain what is going on with the valuation expansion of our companies. If you want to learn more about it, I suggest you reread the explanation in June’s summary.

A REMINDERWhen I give portfolio gains and losses over years, it’s in percentage of how my investments did, but (unfortunately) not in percentage of dollars of assets. Why? Because I’ve been retired for 23 years and living off my investment gains. No pension, no other source of income besides Social Security (which isn’t much). So over the years, basically all of our family expenses have been paid out of what I make: supermarket, clothes, automobiles, gasoline, kitchenware, furniture, housing expenses, electricity, phone, travel expenses, taxis, restaurants, medical costs, all kinds of insurance, everything you can think of… But Hey, that’s life.

ON MARKET TIMINGI’m no good on timing the market, and I don’t try. Just think about it like this: If I was using market timing, exiting all my positions at the end of April 2017 would have made great sense. I was up a “ridiculous” 26% in four months. I had already beaten my total results of the previous two years, COMBINED!... for God’s sake! That gives you an idea how ridiculous 26% in four months looked to me. It was clearly time to get out and wait for the “inevitable” pullback (that never came), and I would have missed all the 450% gains of the past two years!

It’s the same now. The amount I’m up in seven months seems even more ridiculous, but I don’t know the future, and I am surely not going to sell out of great companies because their share prices have risen.

Picking good companies makes much more sense to me than trying to pick good companies AND trying to time the market too. I have stocks in a small group of remarkable companies, in which I have high confidence for the most part. I feel that they mostly dominate their markets or their niches, they are category crushers or disruptors, they have customers that absolutely need them, they have long runways, and they will have great futures. Investing in great companies pays off.

All enterprises, whatever industry they are in, use more and more software, want to use the cloud, AI, big data, and the rest, and they need the software that our compaies are leasing. Most of our companies provide the picks and shovels for enterprise companies switching over to the cloud, and the enterprise companies NEED what our companies have to offer.

MY RESULTS YEAR-TO-DATEI would have been happy at the beginning of this year with a gain of 25% for the whole year, after the huge gains the last two years. Well, my portfolio closed July up 77.4% year-to-date. This is obviously up substantially from my June close of up 57.7%.

Here is the monthly progress of my portfolio results since the beginning of 2019:

End of Jan +16.5%End of Feb +28.0%End of Mar +36.9%End of Apr +40.7%End of May +42.2%End of Jun +57.7%End of Jul +77.4%

As I said above, I never expected a rise in my portfolio like this for a third year in a row. Well, what has happened to cause this rise????

In 2017 and 2018, we were the lonely few who understood what was happening with our SaaS companies. In 2019, as we can see from the IPO’s of Zoom and Crowdstrike, the investing public has finally caught on to the wave of high growth, high gross margin, recurring revenue, SaaS stocks that we’ve been riding for the last two and a half years (and whose valuations I explained at length in my June end of month summary). This recognition by the investing public caused those two IPO’s to get bid up into very high EV/S valuations. But this was not indiscrimminate buying. Investors showed plenty of discernment, as other hyped IPOs like Uber and Lyft bombed.

This has led me to speculate in various posts over the last two months that this year, 2019, may see the valuations of the rest of our SaaS portfolios get bid up further, though certainly not as high as ZM & CRWD, which were growing at over 100%, after all.

A weighted average revenue growth rate for the companies in my portfolio would probably be about 60%. If my portfolio grows with the revenue increase and tacks on some valuation increase due to the general investing public’s increased desire to have a piece of these companies, it may help us to understand this extraordinary rise for a third year in a row. I have been saying that this year (2019) may be the steep part of the S-curve, and so far, that seems to be true.

For comparison, at the end of July in 2017 my portfolio was up 46%, in 2018 up 55%, this year up 77% !!!!! Doesn’t that sound like the steep part of the curve to you? 😀

HOW DID I GET THERE?After a tumultuous March through June, in which my portfolio had four drops averaging 13.4 points each, July was tranquil, with no major meltdowns, just a zigzag rise. As far as the drops and rebounds, each low was higher than the low before and each high was higher than the high before. I have to admit the lows were unpleasant and a bit scary, but it would have been unfortunate for me to get scared out at one of those bottoms.

It would also have been a mistake to try to time the market and sell out at that first high in March, even though my portfolio was up a truly ridiculous 43% in less than three months. After all, I would have missed the chance to sell out at May’s high of up 48%, or at June’s of up 68%, or at the current high of up 77%, which is more than 34 points higher. If you think you can time your buys and sells to try to time the market, more power to you. Not me!

HOW DID THE MARKET INDEXES DO?

Let’s look at results year-to-date. The three indexes that I’ve been tracking against for ages closed year-to-date as follows.

The S&P 500 (Large Cap) Closed up 20.7% year-to-date. (It started the year at 2507 and is now at 3026).

The Russell 2000 (Small and Mid Cap) Closed up 17.0% year-to-date. (It started the year at 1349 and is now at 1579).

The IJS ETF (Small Cap Value)Closed up 13.9% year-to-date. (It started the year at 131.9 and is now at 150.2).

These three indexesAveraged up 17.2% year-to-date. They gained 1.8 points during the month

If you throw in the Dow, which is up 16.6% and the Nasdaq, which is up 25.5% you get up 18.7% for the five of them year to date. This was up 2.5 points for the month. My portfolio was up roughly 20 points over the same period.

Since the beginning of last year (2018), when the average of the indexes was down 8.5%, the five indexes are up 8.6%. (0.915 x 1.187 = 1.086). Is this the big bull market that the skeptics have been telling us has been fueling our rise? 😀

Now compare that result with my portfolio’s gain of 204.1% in those 17 months (1.714 x 1.774 = 3.041). Read that again! Up less than 9% for the indexes, up 204%, a triple, for my portfolio. Tell me what about those results makes investing in the averages seem “prudent” to you?

And, if you want a real shocker, my results from the beginning of 2017 are above a quintuple and a half, 560% of what I started with, or up 460%! (1.842 x 1.714 x 1.774) = 5.601. Clearly, picking stocks that will be winners, the way we do, has beaten investing in ETF’s and Indexes, and by huge amounts. Let’s put it in table form and round off the numbers for easy clarity:

Since Jan 1, 2019Market indexes + 19%My portfolio + 77%

Since Jan 1, 2018Market indexes + 9%My portfolio + 204%

Since Jan 1, 2017Market indexes + 24%My portfolio + 460%

And that’s without using any leverage, no margin, no options, no penny stocks, no fancy stuff, just investing long in great individual companies. And I’ve told you each month what my positions are, and what proportion of the portfolio they are, so anyone who doubts it can check for themselves. And I’m no genius. Plenty of other people on the board have done about the same, a little more, or a little less, but about the same. So if you didn’t read my explanation in June about what’s going on with our stocks, maybe you should go back and read it carefully.

For more on why I compare against those indexes, please see my summary at the end of 2018. To simply state my goals, I'm merely trying to measure my performance against that of the average return for an investor in the stock market, and combining those five indexes gives a pretty good approximation.

LAST FOUR MONTHS REVIEW

In April, I finally exited Guardant for the last time and put the money into Mongo, Zscaler, Okta, and The Trade Desk. My bouncing around with Guardant didn’t actually amount to much as I gained 10% the first time and lost 2% the second time, on smallish positions.

Here’s why I did what I did! I kept Elastic at a 1% position because its ‘pure open source’ model made me uneasy for a long term holding, as well as the issues of dilution and of the lock-up expiring, and I just preferred to have the money in Mongo which is growing as fast and seems safer. I sleep better with money in Okta, Zscaler, Trade Desk, and Alteryx, which don’t have the same kind of issues. I reduced Guardant, and finally sold out of it, because of all the posts on the board pointing out that Guardant isn’t the sure thing, and huge TAM, that it had originally seemed to me to be.

In May, there were a lot fewer changes. Basically, I sold my 1% position in Elastic and took a small position in Zoom. That was very odd since I wrote in April about how overpiced Zoom was, but then I started taking into account the high margins and higher growth rate (see my opening section in my June Summary for more on that), and I decided to take a smallish position. As far as Elastic, in spite of muji’s and others’ enthusiasm, I couldn’t get my confidence level up to where it needed to be. I just can’t own them all. The rest of my portfolio is pretty much unchanged.

In June, believe it or not, I made almost no changes in my portfolio. I took a token quarter of one percent position in Crowdstrike at $60.80, But then, when Verizon announced its partnership with Zoom for all of Verizon’s business customers, I sold the tiny position in Crowd and moved it into Zoom. That was it for the month, pretty much.

July was another quiet month which means I was basically happy with my positions. I did take back a small position in Crowdstrike at $73.06, and then grew it to its present size of 4.1% after great earnings. I got the funds for the most part by trimming my Trade Desk position and taking a little from my small Square position. Trimming Trade Desk turned out to be very bad timing as Amazon just announced on Friday that it will open its platform to Trade Desk. It’s just a reminder that I don’t always get it right. However, my Trade Desk position is still twice the size of my Crowd position, so no worries and no regrets.

HOW THE INDIVIDUAL STOCKS HAVE DONEHere’s how my current positions have done year-to-date. I’ve arranged them in order of percentage gain. I’ve used the start of the year price for stocks I’ve been in all year, and my initial buy price for stocks I’ve added during the year. Please remember that these starting prices are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years.

Trade Desk from 116.1 to 278.5 up 139.9%Zscaler from 39.21 to 88.21 up 125.0%Okta from 63.80 to 140.53 up 120.3%Alteryx from 59.47 to 121.52 up 104.3%Twilio from 89.30 to 149.95 up 67.9%Square from 56.09 to 81.81 up 45.9% SmartSheets from 39.21 to 54.94 up 40.1% Zoom from 77.63 to 102.20 up 31.7% new in MayCrowdstrike 73.06 to 92.88 up 27.1% 2nd time, new in July MongoDB from 131.47 to 158.06 up 20.2% 3rd time

Exited positions this year showing my gain or loss from the beginning of this year, or from when I first bought if it was during the year, and my average exit price. Please remember that these are from the beginning of 2019, and not from when I originally bought them if I bought them in earlier years. You’ll note that almost all of these were tiny little try-out positions that I ended up deciding against, and don’t represent actual churn of the body of my portfolio

Docusign from 43.75 to 56.80 up 23.4%Zuora from 19.80 to 24.00 up 21.2%Elastic from 71.48 to 83.80 up 17.2%Guardant from 37.59 to 41.50 up 10.4% 1st timeAnaplan from 28.75 to 31.05 up 8.0% CrowdStrike from 60.80 to 64.81 up 6.6%Mongo from 95.0 to 99.9 up 5.2% 1st timeCoupa from 91.95 to 93.13 up 3.0%Abiomed from 325.0 to 334.0 up 2.8% EverBridge from 73.58 to 73.95 up 0.5%Vericel from 17.40 to 17.38 down 0.1%Guardant from 70.70 to 69.50 down 1.7% 2nd time Mongo from 83.74 to 76.20 down 9.0% 2nd timeNutanix from 41.59 to 36.00 down 13.4%

MY HERO COMPANIES.Square, Alteryx, Twilio, Okta and Zscaler have all been in my portfolio for well more than a year now, although I did reduce my position in Square at the end of 2018 and built it partially back in February. The Trade Desk has now hit nine months from when I bought it last October.

Twilio is almost a sextuple in a year and a half, at 5.8 times what I paid for it in January a year ago ($25.70). It is up 483%.

Okta is 4.7 times what I paid for it ($29.95), also a year and a half ago, almost a quintuple. It is up 369%.

Square is also 4.7 times what I paid for it, almost a quintuple as well. It’s up 367% since I first bought it in March 2017 at $17.50, two years ago and four months ago.

Alteryx is up 338%. That means it’s 4.4 times what I paid for it in December 2017, a year and seven months ago, at $27.72, or well over a quadruple.

Zscaler is up 146%, a double and a half, since I bought it a year and a month ago in June 2018, at $35.84.

And finally Trade Desk is up 130%, well more than a double in nine months, from when I bought it at $121.0 last October

This is how you make money in the stock market, buying exceptional companies and holding them as long as the story doesn’t change.

You know, some people see me take tiny try out positions and sell them, or change my mind about exiting, and they announce that “Saul just has great intuition or luck in trading in and out of the market.” They just don’t get it! As you see just above, the great majority of my portfolio (and my profit), is invested in companies that I bought and held on to, and let them quaduple or quintuple.

And another great point from this is:

Do you think I care, or even remember, if I bought Twilio at $25.90, $25.70, or $25.50, now that it’s a quintuple and its price is $149.95? Think about that for a moment! The decision that matters as far as making money in the market is “Do I want a position in this company?” and not “Can I buy it 25 cents cheaper?” If you have a stock that you want to buy because you believe it will triple or quadruple, and then you put in a buy order for it 25 cents, or 50 cents, or even a couple of dollars below the market, and hope that it will FALL to your price, you are out of your mind! But that’s just my opinion.

In May I read a Roundtable Discussion put out by the sponsors of our board, and I came across this sad paragraph by one of the participants:

If we get a sell-off I would definitely consider buying in. It's a stock I've always wanted to get into! Unfortunately, though, this approach has been killing me because the stock is up 60% in the last three months. So I keep waiting for the sell-off, but the sell-off was actually right then, three months ago, when I should have bought it.

I don’t have to say anything else. The guy wanted to get into a company. But he wanted to buy it a few percent lower so that he could congratulate himself that he got a bargain, and think, “Wasn’t I smart?” So he missed a 60% rise in three months, and undoubtedly more since. How many times would he have to succeed at scalping a few percent in order to make up for a 60% gain that he missed?

If you want to be in a company because you think it’s a great company and that its stock will go up, at least take a starter position that you can add to. Don’t wait around for the sell-off that may never come.

ZACK’S RANKINGSI’ve listed my portfolio with Zack’s for years, though I’m not sure why, as I never use their system. They rank stocks daily from 1 (best) to 5 (worst), based on beats or misses, but mostly on whether analysts are raising or reducing their estimates. I think that 50% of stocks get ranked 3 (in the vast middle). Maybe about 18% each get ranked 2 and 4 (above and below the middle), and perhaps 7% or less get ranked 1 and 5 (the extreme top and bottom).

In past years I’ve been used to having mostly 3’s with some 4’s and 2’s, even when my stocks were killing the averages. That’s not odd: for example Schwab’s rating system usually rated my same outperforming stocks as C’s, D’s, and F’s. (I guess my stocks aren’t conservative enough to get past their filters). PS – I just checked: Of the eight of my current stocks that are rated by Schwab (Crowd and Zoom being too new), five were F’s, two were D’s, and I got one C. Whoopee! I have to wonder what Schwab bases their rankings on.

At any rate, for the first time in memory, Zacks has two of my ten stocks rated as 1’s (Alteryx and Zoom), three rated as 2’s, and the rest rated as 3’s. It’s by far the highest my stocks have ever been rated by Zacks, and since their rankings are largely based on analyst rankings, I see this as just one more sign that the analysts are finally catching on.

POSITION SIZES. I’m still trying to keep my portfolio concentrated and streamlined. I’m at ten positions now which is still quite concentrated. My top three positions make up 54% of my portfolio, and the top six of the ten make up 86%. By the way, keeping my number of stocks down really makes me focus my mind and decide which are really the best and highest confidence positions.

Here are my positions in order of position size. Note that the Twilio, Zscaler, and Alteryx positions are larger than I usually like, but they are high conviction Category Crushers. Note also that if you compare with a month ago, the top three are the same companies, and they are separated by just 0.6%, so their order changes literally from day to day. The next three are the same as a month ago too, and in the same order, and the last four also include the same last three companies from a month ago, and have added Crowdstrike. No big changes. Just one new smallish position.

I didn’t make any major changes this month. As I said above, my largest positions are Twilio, Zscaler, and Alteryx. As you can see, they are now all about the same size because Zscaler and Alteryx have been rising faster than Twilio and have caught up. They change position from day to day though, so don’t get excited about which one is in first, second, or third place. They are all small companies but in my opinion they each dominate the market they are in with little credible competition (except do-it-yourself). I’d have to call the three of them Category Crushers, and juggernauts.

Alteryx is now at 17.9% of my portfolio. What they do is to enable non-techies to quickly and easily analyze data. Their clients therefore love them. They changed accountants near the end of 2018 because their accountant, Price Waterhouse, was reselling so much Alteryx software to their other clients, that they could no longer consider it non-material, and wanted to avoid any appearance of conflict of interest. They were happier having Alteryx as a valued technology partner than keeping it as just one more accounting client.

When Alteryx announced December quarter results, they prepared us for their forthcoming change from ASC 605 to the new standard 606. First I’ll give you the 605 results for comparability to previous quarters. their revenue percentage growth looks like this:

2016: 57 672017: 61 50 55 552018: 50 54 59 57

That looked solid as a rock to me. However the change to the new accounting system confused things as it involved more revenue being recognized upfront, and therefore less in subsequent months.

Going on to March results, the percentage revenue growth under the new system was 51%.

Their adjusted gross margin was 90%!

Their dollar based net retention rate was 134.

Their number of customers, which is 4973, is more than triple the number of customers that they had three years ago, and up about 35% yoy.

The number of shares is growing fairly slowly, which is remarkable for one of these super fast growing companies.

They feel they have no competition. From one of their earlier conference calls: “We are in a space where there's little to no competition and a much larger TAM.”

We’ve had some discussion on the board about whether Alteryx is really a SaaS company, since it’s not on the cloud, and whether or not it really matters as its revenue is recurring and its net expansion rate is 134%.

Here’s a paraphrase of Ethan’s post from the Analyst Day in June.

AYX has a Net Expansion Ratio (NER) of 134% overall, but 143% with global 2000 customers which is pretty crazy.

Customers with over $500,000 annual recurring revenue (ARR) have a 70% increase per year!!! That is an insane number. Customers with over $1,000,000 have a 50% increase.

They list their growth drivers as.

Land and expandInternational Channel and partner ecosystemCommunity expansion and extensionInnovation

They really harped how Alteryx simplifies and automates complex processes They identify their ease of use as the number one reason people choose Alteryx. If you look at the Gartner peer review website you will see similar things in the reviews. AYX put out some long term financial operating models for the first time.

So just a quick little back of the napkin math. Currently doing $280 million of revenue, around 62 million shares with a share price about $95... [Saul here: that share price is now $121.52]. ...If we look at what those Margin figures above mean:Operating Margin of 35%-40% at the top end would mean about $112 million in operating profit right now, FCF Margin of 30-35%would be about to $98 million right now.

That would give Alteryx tons…just TONS of flexibility. They have minimal interest payments from their convertible debt (0.5%), I think about 3 million dollars... lets guess their tax rate say 25% which would mean they would end up with about 88 million dollars of net income. 1.42 a share for a PE of 66 and a forward PE of 44. Lots of fuzzy assumptions but if they can do anything close to what their target is then they are going to really start throwing off cash. Zero concerns here about their business model, operating leverage, and execution at this stage.

The stock finished 2018 year up 135% for the year. I feel very justified in calling Alteryx a Category Crusher, with very high confidence level. I’d give it six confidence stars out of six. They will announce June results next week.

Twilio is a 17.5% position. It provides communication services and it seems to have no viable competition in what it does besides “do-it-yourself”. In April Twilio announced enormous results for the March quarter and proved it is still a Category Crusher, a Juggernaut, a One-of-a-Kind company, and a pure phenomenon of nature. Its base revenue growth accelerated from 46% a year ago to 88% this quarter!!!! The last six quarters' growth rates have been:

40%46%54%68%77%88% !!!!

Yes I know that they made excuses for the great growth and said it was partly due to one big customer, and partly due to the acquisition. But these companies always try to damp down expectations like that, so they can beat expectations. Next quarter they will have a different excuse for their enormous growth and for their low guidance.

Now look at dollar based net retention rate: 118% a year ago. That was great. But now it's 146%. That's greater! The last six quarters have been:118%132%137%145%147%146%

They hit adjusted profit in the June quarter last year unexpectedly, and have stayed profitable since.

They had 154,000 Active Customer Accounts, about triple the 54,000 they had a year ago. This was driven partly by customer acquisition and partly by their SendGrid acquisition. It doesn’t take much imagination to think about the cross-selling that can come both ways from that!!!

They continue to have euphoric conference calls:

And the average revenue per customer continues to grow at a 25% to 30% rate.

… I think that that means there's a runway for us for many, many years to be replacing old legacy technology… I think there is going to be no shortage of opportunity for us to do that for years to come.

…It's still day one of this journey.

There was a lot of obsessing on our board and elsewhere about “weak” guidance. For the life of me I don’t understand why anyone even looks at the guidance figures for these companies. Have you ever seen even one of our SaaS companies that doesn’t simply destroy their guidance at least 95% of the time? Why waste your time unless reduced guidance is due to an actual problem with the business (ie Nutanix). Follow the actual results! There has also been concern that Twilio is too big, that the Sendgrid acquisition caused dilution, or that it would slow down growth, that it’s stock is up too little this year (“only” 68% so far), or whatever.

They also announce June results next week. I wrote a long two-part deep dive on Twilio several months ago, in case you missed it.

This month, July, Twilio announced the first roll-out of its Narrowband IoT collaboration with T-Mobile. Not one that moves the needle by itself, but just another reminder that Twilio isn’t sitting still, and that IoT could become another large market for them. I’ll give Twilio six confidence stars. To be honest, probably seven stars on a one to six scale.

Zscaler is at 18.2% of my portfolio. It has an interesting, innovative, and revolutionary idea in Internet security. They feel that putting a hardware firewall around a company doesn’t work anymore, now that the enterprise company is partly in the cloud and people can sign in from anywhere, and sign on to other outside programs from within the enterprise. Zscaler provides native cloud-based security, and as far as I can tell they are far and way the leader in this, if not the only player. They have 100-plus data centers all around the world, which would be difficult for most potential competitors to replicate. Zscaler has been operating them for eleven years.

Here’s what their last earnings looked like:

Revenue was up 61% to $79 million. This was an acceleration from 49% growth a year ago.

Why is Zscaler’s revenue growth accelerating instead of slowing down by the law of large numbers. Well their quarterly revenue was only $79 million. It’s a small company. And they aren’t selling something trivial. It’s the security of the customer’s entire company. For a big enterprise to trust Zscaler with the family jewels of its security requires an act of faith.

Therefore, as Zscaler became a listed company, grew larger, and also signed up more and more large enterprises as customers, they could show more revenue, and more large company references, and thus other large enterprises feel better and better about trusting them. So it snowballs, and with each signing it becomes easier and easier to sign the next large customer, and they seem to have passed that inflection point, and are taking off.

Calculated billings were up 55% from $55 million to $85 million, but billings are lumpy, depending on when contracts start and are billed.

Adj net income was $7.4 million, up from a LOSS of $2.6 million.

Adj operating income was 8% of revenue or $6 million, improved from a LOSS of 6% of revenue or $3 million, a year ago.

Adj EPS was 5 cents, improved from a LOSS of 2 cents

Free cash flow was $4.6 million, or 6% of revenue.

Named a leader in Gartner for the 8th year in a row.

Zscaler Private Access (ZPA) is the first zero trust architecture to achieve AWS Security Competency status, and it achieved FedRamp authorization. This sets the stage to further expand its growth within the Federal market.

The only reasonably recent news is from June, when Zscaler announced a global alliance partnership agreement with NTT Communications (a subsidiary of Nippon Telephone and Telegram) to deliver cloud-based internet and web security that scales to all users, regardless of location, enabling enterprises to securely embrace the cloud.

You’ve probably figured out by now why I’ve built Zscaler into one of my top three positions. In my opinion Zscaler is a Disruptor, a Category Crusher, and a juggernaut like Twilio and Alteryx. The traditional security providers can’t compete with Zscaler because their businesses are built around high-priced hardware and firewalls, and they don’t have the data centers all over the world that Zscaler has. I now give it a full six out of six confidence rating. It sells at a high valuation, as you might expect. Here’s a little plug from a recent post by Tinker which helps explain his and my high confidence.

…Cyber-security is such a core necessity of our modern world that a company like Zscaler - a “mere provider of security services”, but in a different manner - is enabling an entirely different network framework that is far more efficient and useful than what exists….

There seems to be no more core and essential technology today, or one that is more important… than SECURITY…. You cannot run a business today of any scale without serious security – period! Heck you cannot even run a home website showing off baby pictures without keeping the wolves at bay…. Your entire business can be destroyed, demolished, without security. But security that encumbers you is almost as bad. That is what makes OKTA and Zscaler so successful. They not only secure, they simplify and unemcumber you….

Actually I think Twilio, Zscaler, and Alteryx as juggernauts. They are each a one-of-a-kind company. Each seems to control its space and is growing like mad.

Okta is in fourth and has grown into a 12.8% position, and is at a five star confidence level. What Okta does is control individual sign-on to all the apps you use using a native cloud SaaS platform. It’s called identity and access management. It is loved by the people who use it, because they no longer need a million passwords for each program they sign on to. I almost backed it down from 5 stars to 4.5 stars because the rate of revenue growth “fell” from 58% to 50% sequentially. That’s the bad news. The good news is that it became evident from the conference call, and their recent acquisitions, that they do a lot more than smart sign in, more than I can understand, for sure, and it seems likely their revenue growth will take off again.

In early April, while some on the board were reducing positions or selling out because the price had risen so much year-to-date and was then “overvalued”, I added considerably at about $83, and added much smaller amounts at $92 and $103. It’s now over $140. That’s up 69% from that April purchase I just told you about. I don’t sell out of stocks because they have gone up. I only sell out if the story has changed for the worse. This is a Disruptor and Category Leader, and a Cloud-based New Market Stock.

MongoDB is now in 5th place at 11.6% of my portfolio. I’ve been in and out a couple of times, being scared out by Amazon, Red Hat and a lot of other FUD, each time having to buy back at a significantly higher price than the one I had sold at. That’s life! I can’t think of anything that will make me sell again except bad operational results, which I don’t think will happen.

Mongo has pretty much invented its solution and category, although it does have competition. It’s the leader in NoSQL data storage. It has chosen to put almost all its money into growing, and thus is still running an adjusted loss, which was 28% of revenue for 2018, down from a loss of 49% of revenue in 2017. (Under ASC 606 the loss was only 19.5% of revenue for 2018).

What has changed Mongo is Atlas, which gives it a fully managed cloud solution, and Atlas is growing at about 300%, although off a small base.

They announced April earnings in June. Here are some highlights:We delivered excellent quarterly results driven by strength across all products and geographies. Our success is being driven by growing customer interest in a modern, general purpose database for use on premise and in hybrid and multi-cloud environments to help users innovate more quickly and efficiently.The continued success of Atlas, our fully managed global, multi-cloud database service, reflects the powerful combination of the move to the cloud and customers' desire for sophisticated managed database offerings. These trends are reshaping the market and we believe will provide a significant growth opportunity for us for the foreseeable future.

Revenue: Total revenue was $89 million, up 78%. Atlas Revenue was 35% of Total Revenue, and was up over 340% • Subscription revenue was $84 million, up 82% • Services revenue was $5 million, up 33%.• Adj gross profit was $63 million, giving an adj gross margin of 70%.• Adj op loss was $13 million, improved from a loss of $19 million a year ago.• Adj net loss was $12 million or 22 cents per share, improved from $19 million or 37 cents a year ago. • Cash is $477 million • Op cash flow was positive $3.2 million • Free cash flow of $2.8 million, improved from minus $8.4 million a year ago.

• A new business partnership with Google Cloud Platform (GCP) that will provide deeper product integration and unified billing for joint customers. MongoDB Atlas will be integrated directly within the GCP Console and we have expanded our marketing relationship. Offering Atlas as a first class service on GCP means customers will get a seamless experience as Atlas will be tightly coupled with core GCP services…

• Acquired Realm, the company behind the Realm mobile database and synchronization platform, to expand MongoDB's mobile product offerings and deepen its relationship with developer communities focused on mobile and serverless development. There are more than 100,000 active developers using Realm.

• Named a Leader by Forrester Research in two recent reports. gave MongoDB the highest scores possible in the Data Security, Performance, Scalability, High Availability, Global Distribution and Ability to Execute criteria, as well as High Availability, Disaster Recovery, Multimodel Support, Automation, User Access and Roadmap criteria.

In June Mongo announced new cloud services and features that will provide a better way to work with data beyond the database. The Beta versions of Atlas Data Lake and Atlas Full-Text Search allow users to access compelling new features in a fully managed MongoDB environment with no additional infrastructure or systems to manage. Furthermore, the general availability of MongoDB Charts lets customers create charts and graphs, build and share dashboards and embed them directly into web apps. (Don’t be fooled, I don’t know what any of this means!)

In July they announced that MongoDB now has the ability to encrypt data by field: It calls the new feature Field Level Encryption. It works kind of like end-to-end encrypted messaging, which scrambles data as it moves across the internet, revealing it only to the sender and the recipient.

Also, this last week we just learned that Amazon AWS has, for all intents and purposes decided that since it can’t beat Mongo it will promote it! What a turn-around!

I’ll call Mongo a Disrupter, a Category Leader, and a Big Data New Market Stock, and I’ll give it four and a half confidence stars for now.

The Trade Desk announced stupendous results at the end of February, and rose $47, or more than 31%, in one day. Revenue was up 56%, with growth accelerating from 42% a year ago. Earnings were up just over 100% (!) Then, in May, they announced results that beat estimates, and all the analysts raised target prices, most by $25 to $30, but the market didn’t like it, because revenues were “only” up by 41%. Management was very upbeat and raised estimates for the year. EPS was up 44% yoy. The stock sold off rather massively but is now back at all time highs, partly because Amazon just announced that they’d let Trade Desk into its “Walled Garden”.

It is an 8.2% position and is in 6th place in my portfolio. I reduced it some this month for money to take a position in Crowdstrike, because of all my larger companies I had the least confidence it Trade Desk (because it’s in advertising). Sorry, just the way it is for me…. Yes, I know that on Friday Amazon announced that it would open its platform to Trade Desk, but I obviously didn’t know that when I trimmed it. It was in 6th place last month and it’s in 6th place now.

I’d rate it four to five confidence stars now, somewhat getting over my mistrust in them over them being an advertising company, because I feel that this is a very unique innovative and creative company. The Trade Desk seems to be a Leader in a Rapidly Growing niche Market within the larger field of advertising, which up to now is controlled by the behemoths.

In 7th place at 4.3% of my portfolio is Zoom, which in April I said was multiples too high. What happened? Well, I thought about the reasons for the high valuations of our SaaS stocks (see my June end-of-month summary), and that changed my mind.

There were a couple of long write-ups on Zoom a couple of months ago, around the time of their IPO, which you might want to look at. Here are some financials, which include their April quarter results, and which will probably amaze you.

• Adj Operating Income was $8.2 million, up from a loss of $0.8 million a year ago. • Adj Operating Margin was 6.7%, up from a small negative.• Adj net income was $8.9 million up from a loss of $0.5 million. • Adj EPS was 3 cents, up from a loss of 0 cents • Cash was $737 million and included $544 million in proceeds from the IPO.• Op Cash Flow was $22 million up from $3 million a year ago. • Free cash flow was $15 million, up from minus $1 million.

Customer Metrics• 58,500 customers with over 10 employees, up 86% • 405 customers contributing more than $100,000 up 120% • Net dollar expansion rate in customers with over 10 employees over 130% for the 4th consecutive quarter.

Then, a month ago Verizon announced a partnership with Zoom, available to ALL their business customers. For me, that was a big Wow!

Verizon Business Group has joined forces with Zoom to offer its global customers a new, unified communications solution that aims to improve organizational collaboration. Zoom’s video-first unified communications platform is now available to all Verizon business customers as a cloud service.

What impressed me especially was that it was Verizon that announced it, not Zoom, and Verizon, a major large company, was bragging about offering Zoom to its customers.

Yes, I know! I don’t really see what Zoom’s moat is either, except that it is obviously doing what it is doing better than anyone else is doing it. Because of this and its high valuation it’s not a high confidence position, so I’m keeping my position small, but I keep nibbling away, adding little bits.

Crowdstrike is in 8th place at a 4.1% position. It’s a new IPO and there have been a couple of extended threads on Crowd this month (July) on the board, so I won’t repeat them. I’ll just give you my tables on their progress. Here they are:

What you have just seen is a company with a revenue run rate of about $400 million, which will have revenue this year of roughly a half a billion dollars, with a rate of revenue growth last quarter of 103%, with subscription revenue making up 90% of the total and growing at 116%, with annual recurring revenue growing at 114%, with subscription gross margin of 73% which is up 11 points from 62% a year ago, with operating cash flow margin of +1%, improved from -7% in the quarter a year ago, with free cash flow margin of -17%, which improved 19 points from -36% the year ago quarter, with adjusted net profit margin of -23%, which improved 44 points from -67% the year ago quarter, with a dollar based retention rate between 120% and 147% (and some reason to think it’s about 140%), and over 3000 customers, with the mumber of customers growing by 21.6% SEQUENTIALLY last quarter, which compounds out to growing at 119% over four quarters (growth was “only” 103% last year, but over 170% the two previous years). My guestimate for revenue growth next quarter is 104%, but that is just a common sense guess, based on the cadence of yoy dollar growth of revenue in recent quarters. What you’ve just seen is a powerhouse of a company.

While it has been stated on the board that end point security is a commodity, companies selling commodities just don’t grow revenue 100% per year, year after year, and especially not with RISING MARGINS, both gross and net. Sorry, but that just doesn’t happen to commodity sellers.

Square, and SmartSheets are very close and are essentially tied for 9th and 10th places. Square is now a 2.54% position. It announced March quarter results in April, and will announce June results next week. It has been annoucing incredibly good results. Its total revenue has grown year-over-year by 39%, 41%, 45%, 47%, 51%, 60%, 68%, 64%, and 59% in its last eight quarters.

How is that happening? It’s because its Subscription and Service Revenue which is its high margin revenue, the good stuff, is growing at over 100%, and is now over 45% of revenue. Quarterly it’s grown year-over-year by 104%, 97%, 86%, 98%, 98%, and then, the last four quarters, by 131%, 155%, 151%, and 126% (!).

Adjusted EBITDA was $62 million, up about 72% from $36 million the year before, and was 12.7% of adjusted revenue.

They’ve were adjusted profitable in 2016, 2017, and 2018, and EPS grew from 4 cents to 27 cents to 47 cents. We also learned that Square’s Cash App passed PayPal’s Venmo in total downloads (which was a big surprise for most of us.

Square also released Square Payroll App in September, and Square Payroll and Square Terminal in October, and Square Reader SDK, and Square Installment somewhere in there, and now Square Card andSquare Payments, and Square Payroll, and Square for Retail, and Square Online Stores (competing with Shopify) so Square is still rolling along for now! I can’t keep track of all of them so I may have missed some. Somewhere in there they added Square Appointments for service businesses, and last week it was Square Invoices.

There seems to be a lot of FUD about Square, which has kept it from reacting to the great results, and I’ve had some worries myself. It was probably one of my lowest conviction companies until I read imyoung’s incredible write-up yesterday. It was post #58092 https://boards.fool.com/fair-and-square-analysis-34259869.as...

I’ll call Square a Rapidly Growing Company in a Rapidly Expanding Market, and I’ll raise their rating from 3.5 to 4.5 confidence stars out of six. I may even add to my position somewhere here, if I can figure what to sell for cash.

SmartSheets is roughly tied with Square and is in 9th place at 2.77% of my portfolio. My three little SaaS tryout companies with 30% to 40% growth and net retention rates of 110% to 120%, were good companies but they seemed like weaker versions of my full position companies. Well, you guys found Smartsheets for me. I established a position and I currently consider it as a long-term hold. I added a tiny bit this month.

Here are the results of its Apr quarter, announced in June.• Total revenue was $56 million, up 55%. • Subscription revenue was $50 million, up 57%. • Prof services revenue was $5.9 million, up 38%.• Adj operating loss was $14.1 million, or 25% of revenue, compared to $11.0 million, or 30% of revenue, a year ago.• Adj net loss was $13 million, compared to $11 million a year ago. • Adj EPS was -12 cents, flat with a year ago.• Operating cash flow was negative $9.2 million, compared to negative $8.2 million a year ago • Free cash flow was negative $13.1 million, compared to negative $9.7 million a year ago.• Cash was $209 million

Business Highlights• Ended the quarter with 80,280 domain-based customers• Customers with ACV of $5,000 or more up to 6,779, up 56%.• Customers with ACV of $50,000 or more up to 518, up 117%.• Customers with ACV of $100,000 up to 189, up 139%.• Average ACV per domain-based customer was $2,675, up 48%.• Dollar-based net retention rate was 134%

It's kind of odd but I don't really see any real weak spots to worry about. I could mention revenue growth rate, but it's hard to worry about a subscription revenue growth rate of 57% for the last quarter and 60% for the last fiscal year. And as far as not moving yet towards a profit, they are still a very small company (TTM revenue not quite $200 million!), and trying to grow as fast as they can. I’d give them four stars of confidence for now.

FINISHING UPI feel that most of my portfolio is made up of a bunch of great companies. But that’s just my opinion, and I can’t say often enough that I’m not a techie and I don’t really understand what most of them actually do at all ! I just know what great results look like. I figure that if their customers clearly like them and keep buying their products in hugely increasing amounts, they must have something going for them and, as I’ve often said, I follow the money, the results. And I listen to smart people about the prospects of these companies.

When I take a regular position in a stock, it’s always with the idea of holding it indefinitely, or as long as circumstances seem appropriate, and never with a price goal or with the idea of trying to make a few points and selling. I do, of course, eventually exit. Sometimes it’s after months, and sometimes after years, but I’m talking about what my intention is when I buy.

I do sometimes take a tiny position in a company to put it on my radar and get me to learn more about it. I’m not trying to trade it and make money on it, I’m just trying to decide if I want to keep it long term. If I do try out a stock in a small position and later decide that it’s not what I want, I sell it without hesitation, and I really don’t care whether I gain a dollar or lose one. I just sell out to put the money somewhere better. If I decide to keep it, I add to my position and build it into a regular position.

You should never try to just follow what I’m doing without making up your own mind about a stock. In these monthly summaries I’m giving you a static picture of where I am currently, but I may change my mind about a position during the month. In fact, I not infrequently do, and I make changes in the position. I usually don’t announce these changes until the end of the month, and if I’m busy or have some personal emergency I might not announce them even then. And besides, I sometimes make mistakes, even big ones! Don’t just follow me blindly! I’m an old guy and won’t be around forever. The key is to learn how to do this for yourself.

THE KNOWLEDGEBASESince I began in 1989, my entire portfolio has grown enormously. If you are new to the board and want to find out how I did it, and how you can try to do it yourself, I’d suggest you read the Knowledgebase, which is a compilation of words of wisdom, and definitely worth reading (a couple of times) if you haven't yet. A link to the Knowledgebase is at the top of the Announcements panel that is on the right side of every page on this board.

For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially:

How I Pick a Company to Invest In, Why My Investing Criteria Have Changed, Why It Really is Different.Illogical Investing Fallacies

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